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The Competitive Causes and Consequences of Customer Satisfaction
Selected Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Providence, Rhode Island, July 24-27, 2005
Daniel H. Simon Department of Applied Economics and Management
Cornell University 354 Warren Hall Ithaca, NY 14853
Phone: (607) 255-1626 Email: firstname.lastname@example.org
Miguel I. Gmez
Department of Applied Economics and Management Cornell University 149 Warren Hall Ithaca, NY 14853
Phone: (607) 255-8472 E-mail: email@example.com
Copyright 2005 by Daniel H. Simon and Miguel I. Gmez. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this
copyright notice appears on such copies.
The Competitive Causes and Consequences of Customer Satisfaction
We conduct two studies to test three hypotheses: (1) Competition increases a firms customer
satisfaction; (2) Rivals customer satisfaction increases a firms customer satisfaction; (3) Rivals
customer satisfaction reduces a firms sales. First, we use store-level customer satisfaction data from a
supermarket chain. Next, we consider a range of industries, using brand-level customer satisfaction
ratings from the American Customer Satisfaction Index. Results from both studies provide support for the
latter two hypotheses, while we only find support for the first hypothesis in the second study.
Satisfying customers is critical to a firms success. Firms that cannot satisfy their customers are
likely to lose market share to rivals who offer better service and products at lower prices. Fornell (2001)
posits that satisfied customers may be the most consequential of all economic assets; indeed, they may
be proxies for all other economic assets combined (120). More broadly, customers are a key stakeholder
group that affects the firms legitimacy and long-term survival (Post, Preston, & Sachs, 2002).
Despite its strategic importance, the role of customers and their level of satisfaction has received
little attention in the strategy literature. While researchers have examined the organizational determinants
of customer satisfaction (Schneider, White, & Paul, 1998), there has been little attention to the role of
competition (Liao & Chuang, 2004). Similarly, while researchers have found a positive relationship
between a firms own customer satisfaction and its performance (Capon, Farley, & Hoeni, 1990), there
has been little effort to examine the impact of rivals customer satisfaction. As a consequence, we know
very little about how firms competitive interaction affects customer satisfaction and firm performance.
Although strategy researchers have not directly examined the role of customer satisfaction, they
have examined the link between competitive interaction and performance. In particular, researchers in the
competitive dynamics area have examined the links between firms competitive actions (Chen, Smith, &
Grimm, 1991; Chen & Miller, 1994), and between firms actions and performance (Ferrier, Smith, &
Grimm, 1999; Young, Smith, & Grimm, 1996). We extend the competitive dynamics literature by
developing theory concerning the extent to which rivals affect a firms customer satisfaction. In doing so,
we examine the nature and consequences of the competitive dynamics among firms, which is a key
objective of the strategic management field (Ketchen, Snow, & Hoover, 2004: 779).
Thus, this paper contributes by developing and testing theory concerning the competitive
antecedents and effects of customer satisfaction. More specifically, we develop and test three hypotheses:
(1) The amount of competition that a firm faces positively affects its level of customer satisfaction; (2)
Rivals customer satisfaction positively affects a firms customer satisfaction; (3) Rivals customer
satisfaction negatively affects a firms sales.
We test these hypotheses in two separate studies. In Study One, we use store-level customer
satisfaction data from a chain of grocery stores. These data are unique because they include customer
satisfaction ratings for all grocery stores (stores owned by the focal firm and by its rivals) in a local area.
They allow us to examine the links between competition and customer satisfaction in detail. In Study
Two, we extend our analysis to a wide range of industries using brand-level customer ratings from the
American Customer Satisfaction Index (ACSI). The ACSI measures customer satisfaction annually for
more than 200 brands. While less detailed, these data allow us to generalize results from Study One.
By linking competition with customer satisfaction, this study offers three main theoretical
contributions. First, it extends the structure-conduct-performance (SCP) perspective to cover a broader set
of firm behaviors. While previous research has linked industry structure with firms pricing behavior,
little research has linked industry structure with the broader construct of customer satisfaction or with
specific dimensions of customer satisfaction. Extending the SCP perspective to a firms customer
satisfaction is important because customer satisfaction comprises a much larger set of activities than just
pricing. We posit that a firms customer satisfaction is a function of three factors: product quality,
customer service, and prices. By linking market structure and customer satisfaction, we substantially
increase the scope of activities that are influenced by industry structure. Moreover, we empirically
examine the effect of competition on overall customer satisfaction, and on each of the three components
of customer satisfaction: quality service, and price. In this way, we can assess which aspects of customer
satisfaction are most influenced by competition.
Second, we extend the competitive dynamics perspective to the realm of customer satisfaction,
linking customer satisfaction with competitive strategy. This paper is the first to examine the competitive
dynamics among firms competing on various dimensions of customer satisfaction. We assess the extent to
which firms respond to changes in rivals satisfaction, looking both at overall customer satisfaction, as
well as the three key components of customer satisfaction: quality, service, and price. In doing so, we
improve our understanding of how firms compete for customers. In addition, by focusing on the
competitive dynamics of customer satisfaction, our paper emphasizes that customer satisfaction is not
only an outcome variable, but it is also a strategic weapon that firms can influence in the battle for
competitive supremacy. This is important for strategy researchers, as it suggests that customer satisfaction
may provide a useful proxy for certain kinds of firm behavior.
Third, we posit that rival customer satisfaction affects firm sales directly and indirectly. While
increases in rivals customer satisfaction are expected to reduce a firms sales, these increases in rival
satisfaction may have an indirect positive effect on firm sales by influencing the firms own provision of
customer satisfaction. Therefore, the overall effect of rivals customer satisfaction on a firms sales is
ambiguous. By considering both the direct and indirect effects of rivals customer satisfaction, this study
enhances our understanding of the competitive consequences of customer satisfaction.
Beyond the theoretical contributions, this study also offers empirical contributions. In particular,
nearly all studies linking competition and customer satisfaction have been conducted in the service sector.
By examining the impact of competition on customer satisfaction in the grocery store business we test our
hypotheses in a new setting. Moreover, by conducting a second study using a broad sample of consumer
goods and services, we are able to examine the generalizability of the relationships between competition
and customer satisfaction. In addition, this paper is the first to examine the links between competition and
customer satisfaction by considering multiple dimensions of customer satisfaction. This yields a more
detailed understanding of how competition affects customer satisfaction.
The rest of the paper proceeds as follows. In the following section we explain how competition
affects the provision of customer satisfaction and we describe how rivals customer satisfaction impacts a
firms sales. We review extant theoretical and empirical research linking competition and customer
satisfaction and we state our hypotheses. In the third section, we describe the data, methods, and results
for Study One. We then do the same for Study Two. Finally, we discuss our findings, including
limitations and future research opportunities.
LITERATURE REVIEW AND HYPOTHESES
The Impact of Competition on Customer Satisfaction
While a long literature in industrial organization (IO) economics has focused on the impact of
competition, in the form of market structure, on prices, very few studies have examined how competition
affects firms overall customer satisfaction or non-price dimensions of customer satisfaction. At the same
time, research in strategy has examined the